What we are seeing, what should we expect, and what can be done

1. Europe and Central Asia What we are seeing, what should we expect, and what can be done

2. What we have seen ECA entered the crisis vulnerable With macroeconomic and financial indicators showing more vulnerabilities relative to other emerging regions But considerable differences within ECA Countries with weaker fiscal, financial, and social policies have been hit harder Markets recognize these differences Weaknesses are being punished more severely, and strengths rewarded

3. What we can expect A deeper crisis than expected Forecasts for the region may still be too optimistic A longer crisis than what is being anticipated Past crises indicate that capital flows do not quickly recover to pre-crisis levels A crisis that will leave the region changed Post-crisis growth is likely to be lower than pre-crisis growth rates in ECA

4. What we should do Fiscal policy options are limited Most countries do not have space for fiscal stimulus programs Possible exceptions are some middle-income CIS economies such as Russia and Kazakhstan Financial policy measures are necessary To stabilize banking systems, not individual banks Especially for economies with strong financial ties to western banks such as the EU new member states and the Balkans Social policy actions are a priority Region has started to give back poverty gains of the last decade Most countries in the region have social programs that can be strengthened and scaled up to provide targeted assistance

5. Poverty projected to increase

6. What we have seen

7. The slowdown is sharpest in ECA Growth is expected to fall more than in other emerging regions GDP growth (annual percent change)

8. ECA countries Non-ECA countries But liquidity problems vary within ECA Short term debt to FX reserves ratios vary, with some CEE countries having large numbers while some CIS and SEE countries look comfortable. Greenspan-Guidotti rule; risk zone for values above 1.0 Source: WEO and DEC.

9. 40-60% is risk area in previous KACs; though not all ECA subject to KAC risks ECA countries Non-ECA countries FYR Macedonia Large variation in debt ratios too Many ECA countries have high external debt when compared to other emerging market economies, but some do much better Source: WEO and DEC.

10. Exchange rate regimes vary as well Rigid exchange rate regimes have pros and cons; today the cons are more evident. ECA countries Non-ECA countries Source: IMF AREAER.

11. Bank borrowing varies in the region Loan-to-deposit ratios are especially high in Ukraine, Belarus, and the Baltics Loan-to deposit ratio, 2008

12. Safety nets are less suited for crises ECA spends a lot on social insurance, but less on social assistance programs

13. FYR Coverage of Poorest Fiscal Effort Social assistance programs also vary ECA countries spend more than 2 percent of GDP on social assistance, but targeting efficiency varies

14. Unemployment rising, but not everywhere (though it is still early) Change in registered unemployed, latest month compared to 12 months earlier

15. What we can expect

16. Growth forecasts were too rosy Forecasts for economic growth in 2009 have come down a lot, with the sharpest adjustments in growth for ECA

17. Low- and middle-income High-income But it may have been unusual Growth in low and middle income countries was unusually high relative to high income economies since 2000 Global IP 12m/12m % (monthly) growth Source: World Bank, DEC Prospects Group.

18. The region’s financing needs are big Potential financing gaps in the region could be as much $300 billion using assumptions on foreign credit and investment flows that draw on past crisis experiences

19. What should be done

20. The decade was a good one for ECA Helped by international trade, financial and labor flows, regional GDP grew by two-thirds of its level in 2000

21. Fiscal stimulus spending may be possible in some economies Note: These reflect measures above and beyond the affects of automatic stabilizers.

22. But fiscal stimulus spending is not an option for much of ECA Fiscal space available to undertake a fiscal stimulus program for countering the impact of the financial crisis, based on World Bank staff assessments in early 2009

23. Trade channels must be kept open… Product market linkages which channeled prosperity to the region over the last decade must be kept open during the crisis

24. Many ECA countries have foreign bank ownership which have brought benefits Banks in Central and Southern Europe are generally foreign owned Foreign banks share in total banking sector assets (in %; end-2007)

25. …and should stay financially integrated. Financial market linkages which channeled prosperity to the region over the last decade must be kept open during the crisis Parent-daughter links are likely to be stronger than other private flows Three Examples of Dependence to Western European Banks Source: Zsofia Arvai, Karl Driessen, and Inci Otker Robe, 2009, "Regional Financial Interlinkages and Financial Contagion within Europe," IMF, WP/09/06; BIS data at end-2007.

26. Poverty gains are now at risk $2.5 a Day Poverty Rate Projections (%) $5 a Day Poverty and Vulnerability Projections (%) Human Crisis? A 2.6 percentage point increase in poverty and 7.1 percentage point increase in poor or vulnerable is likely by end of 2010 Source: World Bank staff estimates.

27. But most countries have programs that can be improved and expanded Potential to build on existing programs Few lack well-targeted program One or more targeted program, though often with low coverage High spending, weak programs Low spending, weak programs • LICs / Lower MICs • Albania (NE Program), • Armenia (FPB) • Azerbaijan (TSA) • Georgia (TSA) • Kyrgyz (UMB, MSB) • Macedonia (SB with reforms) • Ukraine (Ext. Poor program) • LICs / Lower MICs • Moldova • Bosnia & Herz. • Belarus (TBC) • LICs • Tajikistan • Upper MICs • Bulgaria (GMI) • Croatia (Support Allowance) • Estonia (GMI + FA) • Latvia (GMI + TFA) • Romania (GMI) • Serbia (MOP) • Turkey (CCT, Green Card) • Upper MICs • Russia • Hungary • Kazakhstan • MICs • n.a.

28. Migration channels must be kept open Labor market linkages which channeled prosperity to the region through migration over the last decade should be kept open during the crisis

29. Messages ECA countries were vulnerable, but there are also large differences among countries in the region With 7 months of the crisis, the region has started to lose the poverty gains made over the last 10 years Fiscal policy options during the crisis are limited Keeping trade channels open is the most promising way for ECA countries to benefit from fiscal policy But financial measures are possible and necessary Keeping capital market linkages strong is the only way for ECA countries to finance some of their financing needs And social policy actions should be a priority Keeping labor market channels open is necessary, but not sufficient. ECA countries spend large sums on social protection, and have the mechanisms necessary to target assistance to the poor and vulnerable

30. Messages Human Crisis Looming in Europe and Central Asia Since 1999, some 90 million people were lifted out of poverty and vulnerability in Europe and Central Asia Today, global crisis pushing almost 35 million people back into poverty and vulnerability